Biofuels

How has the biodiesel market been affected by uncertainty stemming from the recent renewable fuels credit fraud cases? During today's OnPoint, Dan Oh, president and CEO of the Renewable Energy Group, the United States' largest biodiesel producer, discusses changes to the biodiesel credit market resulting from the trading fraud. He also explains how the absence of a production tax credit will affect small and large biodiesel producers.

Monica Trauzzi: Dan, the renewable fuels industry has recently been battling fraud cases dealing with the purchase of fake renewable fuels credits. It's causing uncertainty in the industry and has had negative impacts on small producers. As the largest biodiesel producer in the U.S., what has been the impact on your business?

Dan Ho: Well, the entire industry has gone through rigorous counterparty analysis. So, when you think about RINs and the importance of them in the support of RFS2, and how they bolster production, they have to have the highest integrity and quality. So, we've been completely supportive of ensuring that people have access to check, audit, do things like that throughout the industry. And we understand that that's completely necessary. We've been very involved with the National Biodiesel Board and have been supportive of efforts to increase the rigor to the level it's necessary to make sure people are comfortable, because we've got to have comfortable customers.

Monica Trauzzi: Have you seen any drop-offs in production or support for your company specifically?

Dan Ho: The capabilities at REG are such that we have economies of scale and we're able to have a rigorous compliance process. And companies have done business with us for many, many years, so I think folks are comfortable with our capabilities.

Monica Trauzzi: What needs to happen with the biodiesel credit market though in order for things to move forward in a sound way, in a way that's protected and that people trust?

Dan Ho: Well, I think that's already happening and what's occurring is the customers, the obligated parties who ultimately end up with RINs as proof that they've been complying with RFS2, have been going through their own counterparty, just like you have to do with credit or any other customer relationship. And those who trade in biodiesel and those who end up with the RINS are out there doing their own checks right now to make sure they're comfortable. Along with that, we do support the EPA being very rigorous in enforcing discipline to make sure that people are doing the right thing and are motivated to do that.

Monica Trauzzi: So, do you feel there's been enough transparency in EPA's handling of this process?

Dan Ho: We recognize it's an early time in the system and that people have been figuring out how to operate and implement, but I do think the EPA is working hard to make sure that it's good.

Monica Trauzzi: So, overall, do you think there is permanent damage to the renewable fuels marketplace as a result of these cases?

Dan Ho: No, I do not. The overall cases of RINs, while they've been very visible and appropriately so, because, you know, we're glad that folks that aren't doing the right thing are being pursued, the overall impact on RINs as a volume matter has been relatively small. So as long as we come back quickly and ensure that the customers are comfortable and that there's a rigorous process in place, I think it will be OK.

Monica Trauzzi: So, do you think there's been a fair amount of concern or attention coming from Congress on this issue?

Dan Ho: There's been a lot of attention. Of course, there have been hearings on that and we've been represented through our association, some of our own folks who have been there testifying. But I think that as Congress has reviewed it they've looked at it and said let's make sure the system is working and that's what folks are about doing right now.

Monica Trauzzi: Last year your industry produced a record amount of fuel.

Dan Ho: Yup.

Monica Trauzzi: Even exceeding the fuel standard. We've seen a recent slip in production and many people attribute that to the fact that there is some uncertainty relating to the biodiesel production tax credit. How dependent is your business on that tax credit?

Dan Ho: We're built to be able to take advantage of many different raw materials so that we can be efficient. We're focused on waste and co-products first, in terms of those raw materials we want to use that create profit-making opportunities. I think RFS2 actually works pretty well and that it's a market-based mechanism. There is an RVO that gets put out every year and then we're supposed follow that, but there's no guarantee through the year that anyone has business. We've got to put together a tough, hard-core company that deserves to be in business, just like it would in any other environment. And that's what we're focused on doing. So, whether there's a production credit or not, we still have to be able to make money.

Monica Trauzzi: So, I take that to mean that you would do just fine if that tax credit was not extended?

Dan Ho: We think it's important to be there because it supports growth at a quicker rate to meet those RFS2 goals, but we have to plan for it not to be there.

Monica Trauzzi: You tout your business model as being more low-cost than other biodiesel producers in the country. What are you doing that's different and how is it sustainable when we're talking about long-term success?

Dan Ho: Well, we're focused on producing from a wide range of feedstock, so one of the things that has created issue for other commodity companies is being reliant on just one. And when the markets move, for many different reasons, that can get you in a tough spot. So, first of all, very flexible on feedstock. Secondly, very efficient logistically. We sold in 43 out of 50 states last year and we are expanding our footprint as a company to be even more efficient logistically. And then we're very careful about our business and our balance sheet and trying to ensure that we've got the capabilities we need to be durable.

Monica Trauzzi: And are you trying to be a game changer in the biofuels discussion?

Dan Ho: We have been around for 16 years as a division of our old parent company aren't around, and I think along the way we've been very agile and durable and we're here today driving business. So I hope we are, but our goal is to take care of our shareholders and make sure we're making a great product.

Monica Trauzzi: And your company has sites to expand internationally, is that difficult to do with so many challenges in the United States market?

Dan Ho: International expansion is important to our future and we look to do that. Right now we're principally focused on North America, but that does include Canada and those borders there. Overall, international expansion I think is important to most companies in biofuels because it's a worldwide complex of raw material. Regulations are different continent to continent and if you're not conscious of those international markets, even if you're just operating in North America, you could be at a disadvantage.

Monica Trauzzi: All right, we'll end it there. Dan, thanks for coming on the show.

Dan Ho: Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.